Mumbai, Nov 26: The State Bank of India (SBI) plans to tap the international derivatives market soon to hedge the price risk on the yellow metal collected by the bank under its gold deposit scheme. "SBI plans to hedge the price fluctuations in the value of gold by buying suitable derivative contracts including over-the-counter (OTC) products to protect itself against the price risk arising out of the sale of gold," a top SBI official told The Financial Express.SBI chairman G G Vaidya told newspersons that the bank has mobilised 400 kg of gold since the lauch of the scheme in New Delhi on November 19. The Shri Sidhi Vinayaka temple trust became the first depositor under the scheme in Mumbai.
The scheme will initially be made available at select branches and later would be expanded throughout the country. "We are not only targeting religious trusts, but also individuals as lot of gold are with them," he said.
The SBI chief said Credit Suisse Financial Products, a subsidiary of Credit Suisse First Boston, will be the overseas partner in the proposed assaying company-SBI Gold and Precious Metals Pvt Ltd. It will be set up as a subsidiary by the bank for assaying and hallmarking purposes. SBI will have a 51 per cent stake, Credit Suisse Financial Products will hold 26 per cent while three public sector banks will pick up the remaining 23 per cent.
"Any decision to use derivative products will be taken after substantial quantity of gold is collected by the bank under the gold deposit scheme. The gold stock sold will have to be protected against changes in prices, for which the bank may hedge using derivative instruments," the SBI official pointed out.
The official hinted that in the case of loans against gold deposits, the cost of hedging will be factored into the cost of deploying the gold.
SBI plans to provide rupee loans to gold depositors at an interest rate of 9-10 per cent against 3-4 per cent interest on gold deposits. However, the bank will keep a spread of only 1-1.50 per cent, with the remaining accounting for assaying cost, SLR maintainance charges, cost of hedging and other expenses.
The RBI had recently allowed banks to use derivative products available overseas to hedge price risk on sale of gold collected under their gold deposit scheme. The RBI has banks to use exchange traded and OTC derivative products for hedging the price risk on gold. The central bank has however stipulated that while using options, banks will have to ensure that there is no net receipt of premium, either direct or implied.
Banks allowed to enter into forward gold contracts in the country are also allowed to cover their price risk by hedging abroad using derivatives.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.